During the past three years and three subsequent pandemic waves, we have witnessed various macro-economic challenges - markets have crashed and recovered. Though 2021 saw equity markets rally to unexpected levels, markets currently have been volatile in anticipation of the Fed policy review, making investors anxious. One of the most pressing challenges that took centre stage during the pandemic and is still a threat is the risk of global inflation. Even in India, we have seen inflation levels rise above the RBI threshold for consecutive periods.

Traditionally in India, a high percentage of household savings was allocated to fixed deposits. However, when it comes to a real rate of return to cope with inflation, you cannot rely completely on fixed deposits. Therefore, investors are now increasingly exploring diversified mutual funds over traditional fixed income investments such as fixed deposits.

If you look at a typical consumption basket, it has grown at 10.1% CAGR while fixed deposits have generated about 6% returns over a very long-time frame.

Past performance may not be sustained in the future. The Consumption basket data is derived from Private Final consumption Expenditure data from CMIE using components that make a typical consumption basket and how average spending on such consumption basket has increased over time. 2021 Estimates of the consumption basket spending is derived using long term average over the 2020 data, Given that 2020-21 were pandemic period, the actual data will be different from those of estimates but that would probably normalize going forward and hence we have used long term averages for calculation purpose. Quarterly compounding and Tax rate on Fixed Deposit assumed to be 30%. Data as of December 2021.

As you can see in the table above, Gold prices have kept pace with the rising prices in a typical consumer basket over the last 30 years and have stood as a long term store of value, whereas returns from equities have exceeded inflation rates. Equity mutual funds historically have helped cope with inflation over the long term and offer us net real returns.

Equity mutual funds have the potential to provide a market linked real rate of return than a traditional fixed deposit and can be more tax-efficient over long term, especially for the highest tax bracket.

For instance, a person under the highest tax bracket would have to pay 30% tax on his FD returns irrespective of the duration. However, an investor who invests in equity mutual funds over the long term (exceeding duration of 1 year) will need to pay tax @ 10% for capital gains exceeding Rs. 100,000.

So, the question is if equities are helping investors cope with inflation, do they need other assets in their portfolio?

All assets and investment styles are cyclical

Time and again, crisis has taught investors valuable lessons on diversification. We have seen asset classes perform differently across time periods. During the 2008 GFC (Global Financial Crisis), equities took a hit of 52% as you see in the illustration below. Imagine an investor who would have invested solely in equities in 2008 and then redeemed out of fear and missed out on the rally in the year thereafter.

Past performance may or may not be sustained in future

The chart ranks the best to worst performing indexes per calendar year from top to bottom
*Data as of December 2021
Based on S&P BSE Sensex; Domestic Gold prices and
CRISIL Composite Bond Fund Index
Source: Bloomberg

Similarly, during the onset of the Pandemic, investors who had concentrated heavily in equities saw their portfolio value diminish considerably than those who would have resorted to diversification using other balancing assets such as Gold and Debt. The process of diversifying one’s investments across multiple types of assets to create a balanced portfolio is termed asset allocation.

Instead of stock selection and timing the market, the risk in a portfolio can be reduced by bringing together asset classes whose performance are imperfectly correlated and is not affected by the same factors or in the same way.

Though equities could be a bulk of asset class within an investor’s asset allocation strategy, their portfolio needs these other assets of Debt and Gold to offer the benefits of diversification and lower downside risks.

Thus, a person who would have resorted to disciplined asset allocation by dividing his investment across three assets of Equity, Debt and Gold (refer chart below) would have minimized downside risks and earned better risk-adjusted returns than an investor who invested only in equities.

How diversification would have helped limit downside risks

Past performance may or may not be sustained in the future.

Asset Allocation using the 12-20-80 Asset Allocation Strategy

You can perform asset allocation by yourself using the 12-20-80 DIY (Do-It-Yourself) asset allocation strategy. We have witnessed this strategy working across time horizons, across cycles, and across three waves of the Pandemic and previous Black Swan events as well. It has helped investors emerge stronger and victorious in each of those phases. It acts as the magic formula that offers the potential to help you ride the market cycles and achieve your long-term goals.

12 months of emergency money – The Safety Block

Before you can start investing in the equity markets, you have to set aside an emergency fund that helps you be better prepared to meet unexpected medical expenses and close debts arising out of unforeseen events such as job losses or pay cuts. This emergency fund should see investors through 12 months of expenses.

Please note the above is a suggested fund allocation only and not as an investment advice / recommendation.

To qualify as emergency money, it should meet the following criteria:

1. Liquid, i.e., it should be available when required

2. Safe, which means this money cannot be invested in highly volatile instruments.

3. Low correlation with other assets – Investors should not risk it and try to earn high returns.

Ideally, investors need to park this money in a safe place like a bank account or a Quantum Liquid Fund scheme that qualifies as a Safety or the Foundation block of their portfolio.

Advantages of investing in Quantum Liquid Fund

• Option to withdraw (up to Rs.50K) whenever investors need it.

• Works on the 'SLR' principle, prioritizing safety and liquidity over returns.

• Portfolio comprising of AAA/A1+ rated PFI/ PSU securities and government securities with a duration not exceeding 91 days,

• Does NOT invest in Private Papers / Corporate Instruments

• Relatively low interest rate risk (classified as A-1 as per the PRC matrix).

Risk Reducing Block:

Investors can capitalize on Gold’s risk-reducing characteristics and allocate 20% of their portfolio to the yellow metal through innovative forms such as Quantum Gold Fund ETF and Quantum Gold Savings Fund. Gold generally tends to perform better when equities are under stress thus helping your investors lower downside risks.

Advantages of investing in Quantum Gold Fund

• Ease of investing in Quantum Gold Fund (ETF) through a DEMAT account

• Backed by pure gold of 99.5% finesse sourced from LBMA accredited refiner

• All gold bars held by the fund go through an independent purity test

• Option to invest in Quantum Gold Savings Fund through an SIP (Systematic Investment Plan) of as low as Rs. 500

Growth Block – Allocate 80% to an equity bucket:

Even within equity as an asset class, investors need to diversify across market capitalization such as large–cap, small-cap, mid-cap, etc. As different investment styles and market cap perform differently as per different cycles. For instance, the year 2021 saw value investment style outperforming the growth style of investment. During the Covid-19 induced market collapse, value fund managers got a great opportunity to acquire high-quality stocks at attractive valuations, thereby generating risk-adjusted returns when markets recovered. Last year also saw mid and small cap funds performing well and though large cap funds showcased relatively lesser returns, they performed on par with relatively less volatility over the longer period.

Therefore, an equity portfolio should also be diversified as per investment styles and market cap.

Diversify the balance 80% across an equity bucket that is market cap, sector, or style agnostic comprising of Quantum Long Term Equity Value Fund, Quantum Equity Fund of Funds and Quantum India ESG Equity Fund.

Quantum Long Term Equity Value Fund – Salient Features

• 15-year track record following the Value style of investing

• Long term believer of India's growth story

• Bottom-up stock selection comprising of stocks tuned to grow with market recovery

• Potential to limit downside risks

Quantum India ESG Equity Fund – Salient Features

• Value & sector agnostic diversified portfolio

• One of the first ESG fund launched in India incorporating Environmental, Social and Governance parameters

• Does not rely on third party research, uses in-house comprehensive & robust proprietary framework

• Potential to protect returns in down markets

Quantum Equity Fund of Funds – Salient Features

• Underlying investment is in third-party Funds with performance across market cycles

• Benefit of indexation for long-term investment

• Ease of tracking just one folio and one NAV

• Robust qualitative and quantitative research

• Periodical review meetings of chosen funds

Thus, by using one asset allocation solution with three underlying assets in Equity, Debt and Gold, you can be on their way to overcoming market uncertainty, cope better with inflation and achieve their long-term financial goals.